In May 2016, the Consumer Financial Protection Bureau (CFPB) proposed a new rule designed to rein in some of the worst behaviors of big banks and predatory lenders.
For decades, these financial institutions have been using forced arbitration clauses — fine-print language usually buried deep within multi-page agreements with a consumer — to wipe away customers’ rights to band together and sue them in court. These clauses allowed banks and payday lenders, among others, to break the law, trick their customers in illegal ways and not have to face any consumer lawsuits.
{mosads}After a lengthy empirical study proved, beyond doubt, that forced arbitration clauses harmed consumers and enabled banks to break the law and get away with it, the CFPB has issued a rule banning forced arbitration clauses with class action bans in financial services contracts.
According to Bloomberg, “The bureau received nearly 13,000 comments on the proposed rule,” which would prohibit arbitration clauses as part of financial contracts, during the public comment period. Because of the long gestation period, some commentators predicted that the bureau would abandon the rule in the face of pressure from industry-friendly politicians.
But Monday, the agency made clear that, after sifting through those comments, it believes the rule is necessary and important. That’s because the facts are the same now as when the study was completed: Forced arbitration hurts consumers a lot. The political landscape may have changed, but that’s no reason why the bureau should walk away from the evidence in its study.
The rule announced Monday is a common-sense move to protect consumers that will have a sweeping effect on millions of Americans.
Consider, for example, Wells Fargo. When the bank was caught opening fraudulent accounts that customers never asked for, the bank’s lawyers cited the arbitration clause in its customer agreements to try to keep customers out of court. While more than 2 million people were impacted by Wells Fargo’s deceptive and deceitful practices, the bank dug in its heels, telling United States senators that it “believes that the use of arbitration is a fair and efficient process that serves the needs of both parties.”
Yet as CNN reported in its coverage of the scandal, forced arbitration clauses “help hide misbehavior by companies in private mediation rather than opening it up to scrutiny in public court documents.” Twice — in 2014 and 2015 — consumers had filed class actions against Wells Fargo that would have stopped the illegal practice, and both times, the bank was able to use its forced arbitration clause to keep the fraud going, unhampered.
In short, forced arbitration is a win-win for banks: They get to hide their business practices that defraud customers while also denying those customers the right to band together and take them to court.
The CFPB’s rule changes that. But it’s not just big banks that would finally be held accountable for their actions. Payday lenders – some of the worst players in the financial sector – would also finally be prohibited from using these clauses.
On that front, consider what happened in North Carolina, one of the few states where payday lending is illegal. I was co-counsel in five cases brought against payday lenders in North Carolina state court. Three of those five cases were litigated before a court decision (Concepcion), which opened the door for banks and lenders to bar class action suits through the use of arbitration clauses. Those three cases settled for $45 million and more than 200,000 consumers received a check from the payday lenders in question.
The last two cases – which were post-Concepcion cases where customers were subject to arbitration clauses even when the evidence proved that the arbitration clauses would gut consumer protection laws – were thrown out. It’s quite clear that not a single one of those customers pursued their claims in arbitration and recovered anything.
The CFPB rightly concluded – after an exhaustive study of more than 400 private class actions over a period of several years – that exempting the financial industry from the normal legal system has had far-reaching — and terrible — consequences. Predatory lending and dishonest practices have pushed millions of people right into desperation and left them with no suitable legal recourse when the banks and payday lenders screw them over.
Given how devastating the actions of Wells Fargo and various payday lenders have been, along with the number of Americans who have been locked out of court because of arbitration, you might think lawmakers would be eager to rally behind a proposal with such a positive, broad public impact.
You’d be wrong.
Instead, banking and payday lending lobbyists and lawyers have repeatedly and publicly predicted that Republican lawmakers in Congress will quickly kill the rule by evoking the previously obscure Congressional Review Act (CRA). Under the CRA, Congress can kill a rule within 60 days of its issuance and, in doing so, prohibit any government agency from ever issuing a substantially similar rule again.
It is not at all clear, however, that Republican legislators will be eager to follow the industry’s wishes and try to wipe away an important protection for millions of consumers (and constituents) in order to give banks and payday lenders immunity from the law. Indeed, it would be deeply unpopular for them to side with cheating banks over the voters who elected them to look out for the public’s best interests.
If there is a CRA attack on the CFPB rule, we should call it what it actually is: The Wells Fargo Immunity Act. And let’s be clear: The lawmakers who paraded then-Wells Fargo CEO John Stumpf before congressional committees so they could loudly object to the company’s behavior can’t have it both ways: Either they’re for holding crooked banks accountable, or they’re not.
The coming fight on the CFPB’s rule — and, make no mistake, it will be a fight — will tell us once and for all: Are lawmakers on the side of customers (their constituents) who have been swindled by big banks and payday lenders, or are they with Wall Street?
As Pete Seeger once asked, “Which side are you on boys? Which side are you on?”
Paul Bland is executive director of Public Justice, a national public interest law firm that pursues high-impact lawsuits to challenge predatory corporate conduct and government abuses. Find him on Twitter @FPBland.
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